Multiple Choice
Which type of interest earns a bigger rate of return on a deposit over time, assuming the same nominal rate and compounding period?
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1. Introduction to Accounting
Types of Accounting
Multiple Choice
Which debt instrument generally has the highest interest rate in the financial services industry?
A
Government treasury bills
B
Senior secured bonds
C
Investment-grade corporate bonds
D
Subordinated debt
Verified step by step guidance1
Understand the hierarchy of debt instruments: Debt instruments are categorized based on their risk and repayment priority. Subordinated debt is lower in priority compared to other types of debt, meaning it is repaid after senior debts in case of liquidation.
Recognize the relationship between risk and interest rates: Higher risk typically leads to higher interest rates because lenders demand compensation for the increased likelihood of default.
Compare the options provided: Government treasury bills are considered the safest and have the lowest interest rates. Senior secured bonds are backed by collateral, making them less risky. Investment-grade corporate bonds are issued by companies with strong credit ratings, also implying lower risk.
Identify subordinated debt characteristics: Subordinated debt is unsecured and ranks below other debts in repayment priority, making it riskier. This increased risk results in higher interest rates compared to other debt instruments.
Conclude that subordinated debt generally has the highest interest rate in the financial services industry due to its higher risk and lower repayment priority.
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